Impact of Foreign Remittances on Financial Development of Pakistan

Purpose: Mostly developing countries are not receiving the remittances with same speed as compared to workers’ outflow. This cumbersome situation allows developing countries to go to external source of funding (debt) for economic and financial development-FD. Thus, the purpose of this paper is to investigate the nexus between FD and remittances in Pakistan for the period 1976-2015.   Design/Methodology/Approach: The study utilizes the time series annual data for the period 1976-2015. Data were taken from different sources like world bank data source and different economic surveys of Pakistan.  To evaluate the long run relationships between FD and remittances, Auto Regressive Distributed Lag (ARDL) strategy is utilized. Findings: The empirical results indicate that remittances have a significant positive impact on FD (M2/GDP) except for CPS/GDP measure of FD which has insignificant positive coefficient. Implications/Originality/Value: Most of previous literature measured FD with the ratio of money supply to GDP (M2/GDP) however, the current study measured with two indicators i.e. the ratio of money supply to GDP (M2/GDP) and the ratio of bank credit to GDP (CPS/GDP). This is the main contribution in the literature. The study recommends that remittances channelize financial segment of the country in augmented manner and government should encourage Pakistani expatriates to send the remittance through formal sources (e.g. banks). Financial institutions and intermediaries working in Pakistan should exaggerate the recruitment of remittances with the purpose to make them significant source for loanable funds. In addition to this, the concern department should simplify the procedure for sending remittances.